As Canadian heavy crude prices strengthen, oil industry poised for more profits

CALGARY — A year ago, Canadian heavy oil was a discount brand, fetching more than US$40 less than the headline North American crude oil price.

Today Western Canada Select is enjoying a sudden bump. The key Canadian oil blend is trading at its highest level in five months as export jams clear, new refinery demand comes online and frigid weather contributes to production snafus in northern Alberta.

The shift is reflected in stronger prices for the extra-thick crude, which typically commands a lower price as a result of shipping distances and because it takes more energy to refine into transportation fuels. In December WCS prices rose 23.7% compared to a 4.4% gain for West Texas intermediate, the U.S. benchmark price, according to BMO Capital Markets analyst Randy Ollenberger. On Wednesday, WCS for February delivery sold for US$18.50 under WTI, broker Net Energy Inc. said, the smallest discount since July.

I think we are definitely turning a corner on the way Canadian heavy oil is getting to market

The improving outlook is adding to optimism that more profitable days are just around the corner for Canada’s oil industry, after a year of extreme volatility punctuated by export constraints and deep discounts on heavy oil. The price lift could also bolster Canada’s trade deficit, which ballooned to $940-million in November, from $908-million a month earlier, mainly as a result of lower-than-expected crude oil prices.

“If [price] blowouts do occur I think they will be of a smaller magnitude and occur less frequently,” said Martin King, director of commodities research at FirstEnergy Capital Corp. in Calgary.

“I think we are definitely turning a corner on the way Canadian heavy oil is getting to market,” he said. “There’s been some genuine infrastructure changes taking place that are going to make this a better place to be.”

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WCS prices have also been buoyed by cold weather-related setbacks in the oil sands, to be sure. Frigid temperatures contributed to lower-than-expected production in December at Suncor Energy Inc.’s operations, Canaccord Genuity analyst Phil Skolnick said this month. Extreme cold weather also hampered December production levels at the Syncrude Canada Ltd. venture led by Canadian Oil Sands Ltd., he said in a note.

But some analysts point to a more structural shift at play: Demand for Canadian oil from U.S. refiners is rising, while new pipeline paths and the proliferation of crude carrying trains are reducing transport clogs in the market.

After several false starts, BP PLC said last month a multi-billion dollar upgrade to its massive refinery in Whiting, Ind. was complete, substantially boosting the plant’s capacity to handle heavy, sour crudes from Canada.

The plant could take up to 260,000 barrels per day of heavy oil beginning over the next three months, according to RBC Capital Markets, providing a significant new outlet for Canadian crude.

Such new demand supports WCS prices “sustainably narrowing” against the main North American benchmark, said Chris Theal, president of Kootenay Capital Management Corp.

At the same time, new transport options are beginning to materialize. Western Canada’s first crude-by-rail unit train facility last month began transporting 50,000 barrels a day of oil sands-derived crude to the U.S., operator Canexus Corp. said.

Estimates vary, but as much as 150,000 barrels a day of heavy oil is now moving to market from Canada by rail, Mr. Theal said. More capacity is under construction, even as a string of fiery derailments focuses heavy scrutiny on the mode of shipping.

Meanwhile, transportation rivals Enbridge Inc. and TransCanada Corp. are working to open several new pipelines that will carry a torrent of Canadian oil to the Gulf Coast.

TransCanada expects its 700,000-barrel-a-day Gulf Coast oil pipeline to begin service later this month, giving oil sands companies their first large-scale access to the Texas refining hub.

Enbridge is working to open its Flanagan South line by mid-2014, clearing the way for another 585,000 barrels to reach Port Arthur, Tex. from the Chicago area via the Midwest storage hub of Cushing, Okla.

It all adds up to expectations of better returns for heavy oil producers as 2013 fades into the rearview mirror. “I think certainly for the heavy oil players in general it will be a big improvement over what we saw last year,” Mr. King said.